In the last year, HSBC’s (LSE: HSBA) share price has fallen by 31%. Clearly, this is hugely disappointing for the bank’s investors and it shows that investor sentiment has weakened significantly. Looking ahead, there’s the potential for HSBC’s share price to come under additional pressure since it’s due to report a fall in earnings of 9% in the current year and this could cause the market to downgrade its valuation yet further.

Due to this, some investors may be concerned that HSBC is at the beginning of a ‘lost decade’, where its top and bottom lines fail to grow at a rapid rate and its share price records lacklustre performance. And with the Chinese economy’s growth rate slowing down and HSBC’s costs rising, its profitability outlook is rather uncertain at the moment.

Despite this, HSBC has huge turnaround potential. Certainly, it’s not without risk and there could be further pain to come over the short-to-medium term. But looking as far ahead as a decade, HSBC has real potential to record stunning total returns.

A key reason for this is the strategy the bank is pursuing. It’s set to make thousands of redundancies, which will form part of a cost-cutting drive aimed to improve the bank’s efficiency. And with its operating costs having spiralled to a record high in recent years while a number of its banking sector peers have been able to reduce costs, HSBC has significant potential to reduce costs and improve profitability.

Growth potential

Similarly, the bank’s top line has huge growth potential. While the Chinese economy is growing at a slower pace than it was a few years ago, it offers considerable growth potential for financial services companies such as HSBC. The rising wealth of the middle class and the current lack of financial product take-up indicate that China could be a high growth market for lending and other financial products. With HSBC being well-positioned in the emerging world, it looks set to benefit from this tailwind.

As far as a ‘lost decade’ for investors, HSBC may also significantly outperform current market expectations. That’s at least partly because it offers a wide margin of safety, which indicates that its downside risk may be somewhat limited, while its upside potential could be significant.

For example, HSBC trades on a price-to-earnings (P/E) ratio of only 10.5 and while it’s expected to record a fall in earnings this year, next year it’s forecast to grow its bottom line by around 8%. This puts it on a price-to-earnings growth (PEG) ratio of just 1.3, which indicates that it offers growth at a very reasonable price.

So, while HSBC has been a poor investment in the last year, it seems to have a sufficiently wide margin of safety as well as the potential catalysts to avoid a ‘lost decade’.

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Peter Stephens owns shares of HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.